Wendy's 2014 Annual Report Download - page 53

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provided a $2.0 million guarantee to a lender for a franchisee, in connection with the refinancing of the
franchisee’s debt which originated in 2007. Pursuant to the agreement, the guarantee is subject to an annual
reduction over a five year period.
(c) The Company has outstanding letters of credit with various parties totaling $17.1 million, of which
$16.8 million are cash collateralized. The Company does not expect any material loss to result from these letters
of credit because we do not believe performance will be required.
Inflation and Changing Prices
We believe that general inflation did not have a significant effect on our consolidated results of operations,
except as mentioned below for certain commodities, during the reporting periods. We manage any inflationary costs
and commodity price increases through product mix and selective menu price increases. Delays in implementing such
menu price increases and competitive pressures may limit our ability to recover such cost increases in the future.
Inherent volatility experienced in certain commodity markets, such as those for beef, chicken and corn had a
significant effect on our results of operations in 2014, 2013 and 2012 and may have an adverse effect on us in the
future. The extent of any impact will depend on our ability and timing to increase food prices.
Seasonality
Wendy’s restaurant operations are moderately seasonal. Wendy’s average restaurant sales are normally higher
during the summer months than during the winter months. Because the business is moderately seasonal, results for
any quarter are not necessarily indicative of the results that may be achieved for any other quarter or for the full fiscal
year.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America requires us to make estimates and assumptions in applying our critical
accounting policies that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses
during the reporting period. Our estimates and assumptions affect, among other things, impairment of goodwill and
indefinite-lived intangible assets, impairment of long-lived assets, restaurant dispositions, realizability of deferred tax
assets, Federal and state income tax uncertainties and legal and environmental accruals. We evaluate those estimates
and assumptions on an ongoing basis based on historical experience and on various other factors which we believe are
reasonable under the circumstances.
We believe that the following represent our more critical estimates and assumptions used in the preparation of
our consolidated financial statements:
• Impairment of goodwill and indefinite-lived intangible assets:
For goodwill impairment testing purposes, Wendy’s includes two reporting units comprised of its
(1) North America (defined as the United States of America and Canada) company-owned and franchise
restaurants and (2) international franchise restaurants. As of December 28, 2014, all of Wendy’s goodwill
of $822.6 million was associated with its North America restaurants since its international franchise
restaurants goodwill was determined to be fully impaired during the fourth quarter of 2013.
We test goodwill for impairment annually, or more frequently if events or changes in circumstances
indicate that the asset may be impaired. We did not initially assess our goodwill for impairment using only
qualitative factors in 2014 and, therefore, we performed our test for impairment using a two-step
quantitative process. Under the first step, the fair value of the reporting unit is compared with its carrying
value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an
indication of goodwill impairment exists for the reporting unit and we must perform step two of the
impairment test (measurement). Step two of the impairment test, if necessary, requires the estimation of
the fair value for the assets and liabilities of a reporting unit in order to calculate the implied fair value of
the reporting unit’s goodwill. Under step two, an impairment loss is recognized to the extent the carrying
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